Generation-Skipping Transfer Tax

Today, the GOP Tax Bill, H.R. 1 was introduced in the House of Representatives.  The Bill is 429 pages long and covers many tax areas that we will cover in future blogs.

As promised, the Bill repeals estate and generation-skipping transfer taxes.  You must live at least six more years in order for your heirs to benefit from this full repeal, because the full repeal will only be effective for decedents dying after December 31, 2023.  For individuals dying after 2017 yet before 2024, the estate tax exemption will increase to $11.2 million in 2018 with cost of living adjustments thereafter.  Under current law, it is scheduled to be $5.6 million in 2018.

Many had feared that the Bill would eliminate stepped-up basis for assets received upon death.  The summary of the Bill prepared by the House Ways and Means Committee confirms that heirs will continue to receive stepped-up basis in inherited assets.

Gift taxes will be retained; however, the gift tax exemption will increase to $11.2 million for gifts made after December 31, 2017.  There will be an annual cost of living adjustment for the gift tax exemption.  After 2023, the maximum gift tax rate will decrease from 40% to 35%.

The estimated revenue decrease from the changes to the estate, gift, and GST taxes is $172.2 billion between 2018 and 2027.

The enunciated primary considerations for these changes are:  (i) to eliminate double or triple taxation of family businesses; and (ii) to incentivize small business owners to invest in their businesses and hire more employees.

Many political commentators are pessimistic about the chances of the Bill being passed in its current form.  Stay tuned.

Tennessee adopted its decanting statute in 2004 and made improvements to the statute in 2013.  Decanting has allowed many of our clients to improve troublesome provisions contained in prior trust agreements.  There are now 22 states that have adopted decanting statutes.  I predict that all states will adopt some version of decanting within the next 10 years. 

Steve Oshins has compiled a ranking of the decanting statutes.  Tennessee ranks 5th on his list.  Two of the three areas where Tennessee loses points are misleading.  Tennessee does allow a trust with an ascertainable standard to be decanted into a discretionary trust.  Mr. Oshins correctly points that our statute does not allow a mandatory income interest to be removed.  We included this prohibition in the statute due to a concern that eliminating a mandatory income interest might create adverse income, gift, and generation-skipping tax results.

Attached is a decanting paper I presented last year when there were only 18 states that allowed decanting.

Even though the GST rate for trust distributions to grandchildren in 2010 was 0%, these distributions are required to be reported on a Form 706-GS(D-1) or 706-GS(T). No tax will be due. However, a trustee who fails to file a return will be guilty of a misdemeanor and can be fined up to $25,000 (or $100,000 if it is a corporate trustee) and imprisoned for up to 1 year.

This reporting requirement applies even if the trust was entirely exempt from GST tax due to the allocation of GST exemption. No return needs to be filed for distributions from trusts that are “grandfathered” from GST tax due to having been established prior to 1985.

The only good news is that the deadline to report distributions made on or before December 16, 2010 has been extended until September 19, 2011. Distributions made in the last 2 weeks of December, 2010 must be reported by April 18, 2011.

The bottom line is that the IRS is requiring the filing of hundreds of thousands of tax returns that cannot possibly owe any tax. Furthermore, there is no information reported on the return that can ever lead to the collection of tax in the future. You’ve got to love our government.